Google to buy Nest Labs in $3.2 billion deal

The Nest smoke and carbon monoxide alarm sits in front of Nest founder and CEO Tony Fadell as he talks about his company in their offices in Palo Alto, Calif., on Tuesday, Oct. 15, 2013. ((Nhat V. Meyer/Bay Area News Group))

In a $3.2 billion deal that expands its beachhead in the business of "connected homes," Google (GOOG) said Monday it will buy Palo Alto startup Nest Labs, which has made a splash in the tech world by taking an Apple (AAPL)-style approach to designing normally humdrum devices.

The deal adds a new dimension to earlier efforts by Google, which has dabbled in "smarthome" technology before. Nest makes sleek, cutting-edge smoke detectors and "self-learning" thermostats that let you monitor your home furnace and air conditioner with a smartphone app.

While the giant Internet company makes most of its money from selling online advertising, Google is increasingly venturing into new businesses. It operates broadband fiber networks in several cities, sells streaming video gadgets and other consumer electronics, and has developed voice-controlled software that tries to learn smartphone owners' habits and provide useful information without being asked.

"This may not have anything to do with what Google started out doing, but it's another strategic move in terms of where the company seems to want to go," said analyst Mark Bünger, who tracks emerging technologies at Lux Research.

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Nest was founded in 2010 by former Apple engineers Tony Fadell and Matt Rogers, who played key roles in the early development of that company's famed iPods and iPhones. Their current venture has won raves from industrial designers and cleantech enthusiasts. And while the company does not disclose sales figures, its $249 thermostat is a bestseller among products in Amazon's home-improvement section.

The company will continue operating under its own brand, selling gadgets that are compatible with both Apple and Google's software, according to the founders, who cited Google's vast resources as their reason for the deal.

"We've had great momentum, but this is a rocket ship," Fadell said in a blog post. "Google has the business resources, global scale and platform reach to accelerate Nest growth across hardware, software and services for the home globally."

The deal represents Google's largest acquisition since it paid $12.5 billion for Motorola's smartphone division in 2011. Google said little about its plans for Nest, but CEO Larry Page praised the startup in a statement that said its mission "is to reinvent unloved but important devices in the home."

Nest's thermostat uses software designed to adapt to homeowners' habits, so it can adjust temperature settings automatically after learning what time residents wake in the morning or come home in the evening. The smoke alarm can tell the thermostat to turn off a malfunctioning furnace if it detects carbon monoxide.

Sales of such "smart" home-energy systems are growing rapidly, according to a recent report by Navigant Research. Other tech giants including Cisco Systems (CSCO) and IBM have also developed technology for homeowners or utilities to manage energy consumption.

Google released a Web application in 2009 that homeowners could use to monitor their energy use online. The company shut down the "Google PowerMeter" in 2011, saying it proved useful but had not caught on as widely as Google hoped.

With Nest, Google is acquiring a company whose products are already popular. Nest also has valuable partnerships with major utilities around the country, which distribute its thermostats and provide incentives for consumers to use power more efficiently.

The deal underscores growing interest in what tech aficionados call "the Internet of Things," in which all kinds of equipment can be managed and monitored online.

With more than $50 billion in annual revenue and $53 billion in cash on hand, Google could be a formidable competitor in that field, said Dave Friedman of Ayla Networks, a Sunnyvale startup that makes Web software for other companies to use with Internet-connected products. Still, he warned, "being a great home device company is not a sure thing for a software company."

With its vast array of other online services, from email and Internet search to its popular Android mobile software, Google has at times been criticized for the ways in which it gathers customer data and uses it to deliver targeted advertising. Anticipating questions, Nest said in a statement that it uses customer information only to provide or improve its own products.

"We've always taken privacy seriously and this will not change," Rogers added.